International Trade and Product Variety – a firm level study

This paper adds to the knowledge of the relationship between international trade and product variety by analyzing the relationship between variety in export supply and exports at the firm-level. Using highly detailed firm-level export data in 2003, the paper finds clear empirical evidence for gains from variety in export supply at the level of individual firms. By applying a decomposition methodology related to Hummels & Klenow (2004), it is shown that these gains can be attributed to a larger amount of markets served and larger export sales per market, roughly on a 50-50 basis. The paper also examines how the export variety of firms varies with distance and GDP across markets. The variety of a firm’s export flows to a market increases with the market’s GDP but decreases with distance. The paper estimates that 15 % of the larger export sales to a market with larger GDP can be attributed to a larger number of products exported to the market. Moreover, the paper finds empirical support for quality differentiation on the behalf of individual firms among markets with different GDP. About one third of the effect of GDP on the total value of the export flows to a market can be ascribed to higher average prices per kilogram of the export products. Products shipped over longer distances tend also to have higher average prices per kilogram.

Introduction: Recent contributions to the theory of international trade emphasize the role of product variety. In this approach, gains from trade arise because consumers’ preferences are assumed to be characterized by ‘love-for-variety’ and imports expand the set of product varieties available for consumption. Scale economies in the production of each variety and limited domestic resources prevent a single country from producing all possible varieties. One of several merits of this type of framework is that it offers an explanation for intra-industry (or two-way) trade. With reference to the new trade theory, a growing literature tries to quantify the relationships between product variety, trade and welfare. For instance, Hummels & Klenow (2004) investigates whether larger economies export more by exporting more of a common set of goods (the intensive margin) or by exporting a larger set of goods to more markets (the extensive margin).